Integer Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 11 speakers on the call.

Operator

Hello, and welcome to the Q2 2024 Integer Holdings Corporation Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Andrew Sen, Senior Vice President, Strategy, Business Development and Investor Relations. You may begin.

Speaker 1

Good morning, everyone. Thank you for joining us, and welcome to Integer's Q2 2024 Earnings Conference Call. With me today are Joe Dzic, President and Chief Executive Officer and Dyrin Smith, Executive Vice President and Chief Financial Officer. As a reminder, the results and the data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non GAAP financial measures.

Speaker 1

For reconciliation of these non GAAP financial measures, please refer to the appendix of today's presentation, today's earnings press release and the trending schedules, which are available on our website at integer.net. Please note that today's presentation includes forward looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our actual results to differ materially. On today's call, Joe will provide his opening comments and Diren will then review our adjusted financial results for the Q2 2024 and provide an update on our full year 2024 outlook. Joe will come back to provide his closing remarks and then we'll open up the call for your questions.

Speaker 1

With that, I will turn the call over to Joe.

Speaker 2

Thank you, Andrew, and thank you to everyone for joining the call today. Since our last earnings call, Truist and Oppenheimer have initiated coverage, which brings the total number of sell side analysts to 9. We appreciate the research coverage from all of our analysts as it gives more investors exposure to our business and the great work that our associates are doing for our customers and the patients that we serve. In the Q2, we delivered another strong quarter of year over year results. Sales grew 9% and our adjusted operating income grew 20%, while expanding operating margins by 152 basis points compared to last year.

Speaker 2

In addition, our adjusted earnings per share grew 14% year over year. We are raising our full year profit outlook. Our manufacturing excellence initiatives are delivering operational improvements in direct labor turnover, direct material scrap production, lower overtime and direct labor efficiency. Combined with our strong first half OpEx leverage, we are confident in our ability to meet our increased full year profit outlook. At the midpoint of our outlook, we expect 18% adjusted operating income growth on 10% sales growth.

Speaker 2

We are confident in our ability to deliver strong sales growth given our high visibility to customer demand, including ramping programs in high growth markets and additional Guidewire capacity coming online in Ireland. It is an exciting time at Integer given our strong pipeline of development programs in faster growing end markets, expanding margins and continued execution of our tuck in acquisition strategy. I am grateful for our associates around the world that are delivering for our customers and making a difference for patients. I'll now turn the call over to Diren.

Speaker 3

Thank you, Joe. Good morning, everyone, and thank you again for joining today's call. I'll first provide more details on our Q2 2024 financial results and then provide an update on our 2024 outlook. We continued our 2024 momentum with strong second quarter financial performance. Sales of $436,000,000 delivered 9% year over year growth on a reported basis and 5% on an organic basis, which excludes the impact of our recent Inuraco and Pulse acquisitions, the strategic exit of the Portable Medical market and foreign currency fluctuations.

Speaker 3

We delivered $91,000,000 of adjusted EBITDA, up $15,000,000 compared to the prior year or an increase of 19%. Adjusted operating income grew 20% versus last year, more than 2 times the rate of sales growth as we continue to make progress on our year over year margin expansion. 2nd quarter 2024 adjusted operating income as a percent of sales was 16.5%, which represents approximately 152 basis points of improvement versus a year ago. Adjusted net income for the Q2 of 2024 is $45,000,000 delivering $1.30 of adjusted earnings per share, up $0.16 or 14% from the Q2 of 2023. C and V and TRM and N product line sales, which represent approximately 91% of our total sales, continued strong year over year growth on a trailing 4 quarter basis in the Q2 of 2024.

Speaker 3

For cardio and vascular product line, trailer 4 quarter sales increased 17% year over year. D and V growth is driven by double digit growth across all markets, new product ramps in electrophysiology and structural heart and the Inuraco and Pulse acquisitions. Cardiac rhythm management and neuromodulation's trailing 4 quarter sales increased 11% year over year, driven by high single digit CRM growth and double digit neuromodulation growth from emerging PMA customers. Further product line details are included in the appendix of the presentation, which can be found on our website at integer.net. In the Q2 2024, we delivered $7,000,000 more adjusted net income than we did in the Q2 2023.

Speaker 3

Strong sales and operational improvements, which include improved manufacturing efficiencies and operating cost leverage, delivered $10,000,000 versus Q2 2023, furthered by slightly favorable foreign exchange. This was partially offset by higher interest expense and a slightly higher adjusted effective tax rate totaling approximately $3,000,000 On a tax effective basis, adjusted total interest expense was approximately $3,000,000 higher than last year. This is primarily due to a higher average debt balance during the period, driven by the previously discussed acquisitions of Inuraco and Pulse Technologies using our available revolver capacity. Our adjusted effective tax rate was 20.7% for the Q2 of 2024 compared to 20.1% in the prior year. Our slightly higher adjusted effective tax rate compared to the prior year was primarily driven by the recent adoption of the OECD Pillar 2 framework by the EU member states, establishing a minimum effective tax rate of 15%, as well as the residual effect of the Malaysian tax holiday expiration.

Speaker 3

In the Q2 of 2024, we generated $47,000,000 in cash flow from operations. Year over year, we generated approximately $10,000,000 more cash from operational execution, primarily from higher sales and improved margins. This was offset by the Q2 2023 accounts receivable factoring of approximately $20,000,000 that did not repeat. As previously mentioned, the factoring was executed to support our capacity investments in Ireland. And in total, 2nd quarter 2024 cash flow from operations was $9,000,000 lower than the prior year.

Speaker 3

In the Q2 2024, we continued our organic investments, investing $31,000,000 in capital expenditures. Our CapEx investment is on track to our expected full year spend of $90,000,000 to $110,000,000 In the first half twenty twenty four, we have invested approximately $60,000,000 in CapEx and our CapEx profile for the year is expected to be lower in the second half as the higher expenditures for the Irish capacity investments are nearly complete. The resulting free cash flow in the 2nd quarter was $16,000,000 which was primarily used to reduce net total debt, which improved by $15,000,000 compared to the Q1 of 2024. As a result, our net total debt leverage at the end of the second quarter was 3.2 times trailing 4 quarter adjusted EBITDA, which is within our strategic target range of 2.5x to 3.5x. As Joe mentioned earlier, we are reiterating our 2024 sales outlook and raising our 2024 profit outlook.

Speaker 3

With strong first half margin performance from execution on our manufacturing initiatives, we have increased confidence in raising the adjusted operating income range by $3,000,000 Starting with sales, we continue to expect to deliver sales in the range of $1,735,000,000 to $1,770,000,000 an increase of 9% to 11% versus last year with organic growth of 6% to 8%, which is 200 basis points above our underlying market growth rate estimate of 4% to 6%. In addition to our organic growth, we expect the Inuraco and Pulse acquisitions, partially offset by the Portable Medical market exit to contribute 3% inorganic growth. We are raising our outlook on adjusted EBITDA by $2,000,000 which now reflects 15% to 22% growth year over year with a range of $357,000,000 to $377,000,000 up from our previous guidance of 15% to 21% growth. We are raising our adjusted operating income outlook by $3,000,000 and expect 2024 adjusted operating income to be between $275,000,000 dollars $293,000,000 reflecting year over year growth of 14% to 21%. At $284,000,000 which is the midpoint, adjusted operating income as a percent of sales is expected to grow 108 basis points compared to the full year 2023.

Speaker 3

Adjusted net income is expected to be between $174,000,000 $189,000,000 reflecting a year over year growth of 11% to 20%, up from our previous guidance of 8% to 18%. This delivers an expected adjusted EPS outlook between $5.07 and $5.49 which is growth of 9% to 18% year over year. Our adjusted EPS outlook assumes adjusted weighted average shares outstanding of 34,400,000 shares taking into account an estimated dilutive effect of the convertible notes. This dilution is offset by an improvement in adjusted effective tax rate, which is projected to be between 18% 20%, down from our initial outlook of 19% to 21%. We expect sales in the second half of twenty twenty four to be higher than the first half of twenty twenty four from new product ramps, increased Guidewire capacity as a result of our Ireland expansion and emerging PMA customer growth.

Speaker 3

We expect Q3 sales to be slightly higher than the Q2 with a further increase in the Q4 of 2024. Moving to our 2024 cash outlook, we expect cash flow from operations between $185,000,000 to $205,000,000 which represents an 8% year over year increase at midpoint of outlook. Our outlook for capital expenditures remains at $90,000,000 to $110,000,000 as we continue to invest in organic capabilities and capacity. As a result, we expect to generate free cash flow between $85,000,000 $105,000,000 We expect our 2024 year end net total debt to be between $10,000,000 $10,000,000 $1,301,000,000 which is up $60,000,000 to $80,000,000 year over year. We expect to end the year with our leverage ratio within our target range of 2.5x and 3.5x trailing 4 quarter adjusted EBITDA.

Speaker 3

And with that, I'll turn the call back to Joe. Thank you.

Speaker 2

Thanks, Byron. We believe we are delivering a very strong 2024 outlook after a strong 2023. Over these 2 years combined, we expect to grow sales 27% and grow adjusted operating income 48% at the midpoint of outlook. We are successfully executing our growth strategy both organically and inorganically to meet our strategic financial objectives for sales growth, margin expansion and debt leverage. We are confident this sustained level of performance will produce a premium valuation for our shareholders.

Speaker 2

We will now turn the call over to our moderator for the Q and A portion of the call.

Operator

Thank Your first question comes from the line of Brett Fishman with KeyBanc Capital Markets. Your line is open.

Speaker 4

Hey, guys. Thank you so much for taking the questions. I just wanted to start off on one of the moving pieces here in cardiovascular segment. We can definitely appreciate that there were, again, very challenging comparisons. But just given the sequential decline in organic growth in that segment, was curious if you could provide a little bit more detail around any moving pieces impacting the quarter?

Speaker 4

And then just looking ahead, if you think investors should expect some type of recovery there into 2H?

Speaker 2

Good morning, Brett. Thanks for the question. So I'll start with if you look at the cardiovascular product line sales on a rolling 4 quarter basis, trailing 4 quarter basis, where cardiovascular is up 17 percent and reported in the quarter was up 11%. You noted the organic growth of 4%. I'll call out the Q1 for cardiovascular organic growth was 9%.

Speaker 2

And for the full year, we're expecting high single digit organic growth for CMV. So when you look at the pieces, we think about the business on a rolling 4 quarter basis. I wish life were linear and I wish our customers manufacturing plans were perfectly linear, but they're not. And so we think the rolling 4 quarter basis is the best way to look at it. And if you look at our past 4 quarters, our electrophysiology business, although we don't report the specific number, it's growing at 1.5 times the market growth rate.

Speaker 2

If you look at our structural heart sales, those are also growing very strongly almost twice the market growth rate recognizing that structural heart is a slightly lower piece of our overall business. And I think we've also been clear that we're under indexed to TAVR and we're really more focused in our growth is in mitral and tricuspid and our Guidewire business there has remained very strong. So when we look at cardiovascular on a rolling 4 quarter basis historically, we continue to see very strong growth. When we look at for the full year, we expect to see high single digit organic growth. And on a reported basis, we expect that to be in the low double digit, call it low teens to mid teens, which is the guidance we provide on the product line slides for cardiovascular in Slide 27.

Speaker 4

All right. Thank you so much for that color. Quick follow-up. On the positive side, we're really impressed by some of the operating margin progression this quarter and guidance for the full year now implies op income growth at a multiple closer to 1.8x compared to 1.7x exiting last quarter. But just looking at the range, it's still fairly wide.

Speaker 4

So just at this point in the year, I was curious what you think of as the biggest swing factors driving multiple or sorry, margin expansion to the low end versus the high end of the range? Thank you very much for taking the questions.

Speaker 2

Sure. We well, I'll start with we have we still have a very strong order book or backlog. It's still close to $900,000,000 That gives us tremendous visibility. We look at our first half sales. We guided 9% to 11% for the year.

Speaker 2

We're at 9.3% growth in the first half. We're doing exactly what we said we would do from a sales growth rate perspective. Margins were a little better in the second quarter, so we've updated the full year outlook to be slightly higher. We didn't update the range. We were halfway through the year, strong visibility to the top line.

Speaker 2

We have confidence in our ability to continue to expand margins. So we felt like updating the profit guidance was the right thing to do at this point. Variability, when we think about the things that have caused that in the past, it's been supply chain disruptions. We feel like we're beyond that. We have a very stable supply chain environment at the moment, which is great.

Speaker 2

Our direct labor turnover continues to improve and our focus on our manufacturing excellence initiatives and our operational improvements continue to gain traction, which is what gave us the confidence to increase the profit outlook.

Operator

Your next question comes from the line of Craig Bijou with Bank of America. Your line is open.

Speaker 5

Good morning, guys. Thanks. Thanks for taking the questions. I wanted to ask maybe drill down a little bit deeper on cardiovascular segment. It came in below Street expectations, but I wanted to know if it was below your expectations.

Speaker 5

And if it was, kind of what areas were below? And then when you talk about the acceleration that you're expecting in the second half business to get to that high single digit number growth number, Maybe just talk about your visibility into your second half revenue for that segment specifically.

Speaker 2

Sure. I'll start with cardiovascular and for that matter cardiac rhythm management, the rest of the business was in line with our expectations in the Q1, Q2 and our visibility given the order book we have to the second half gives us great confidence in our ability to deliver on our guidance. So I appreciate there might have been some exuberance and excitement around a particular segment electrophysiology within cardiovascular after Q1 results and the dialogue around some of the emerging products there. But like I said, we look at a rolling 4 quarter basis. We look at what customers' demand is.

Speaker 2

I wish it were perfectly linear and customers ran their manufacturing plants in a linear fashion, they don't. That determines our sales in the short term, recognizing we're mostly that determines our sales in the short term, recognizing we're mostly sole source. So most of what we do, we're going to get whatever the market demand is over time, which is why we think the rolling 4 quarter view is the most representative. So we were not surprised by the Q2 geography of the sales. We're very much in line with the year.

Speaker 2

Again, I'll point you to Slide 26 in our presentation, which lays out medical sales and non medical sales. So when you look at our organic growth rate, our medical sales are up 7% organically for the year I'm sorry for the first half on an actual basis that's very much in line with our full year guidance and full year expectation for organic growth in medical. And C and B and CRM are very much in line with our expectations. So as we look at second half, we've talked a lot about the investments we made in our new Ross Ireland facility. We now have possession of that expansion.

Speaker 2

So we're now building more guide wires because we have more capacity. We expect that to fuel additional growth in the second half of the year. We have a number of electrophysiology and structural heart programs that are in production and are ramping. I'll contrast that with something with the scenario where you might expect something to start to go into production. These are programs and products that are already in production and now the volume is ramping based upon customer demand and the ramp plans.

Speaker 2

And so when we look at the second half of the year, we're confident in our ability to step up the growth in the Q3. So our guidance is sales slightly higher in the Q3 compared to 2nd with continued nominal increase from 3rd to 4th quarter and very much within the range of the 9% to 11% growth for the full year. That would put us right in the middle of our 6% to 8% organic growth for the year. So 2nd quarter is as expected for us on the top line, a little better on the bottom line, which is why we increased the operating profit guidance.

Speaker 5

Got it. Thanks for that, Joe. Very thorough answer. And I know we've talked a lot about PFA and you guys have talked about it as a tailwind. So I wanted to ask a specific question here.

Speaker 5

So a number of the players in that space, they're talking about in sourcing manufacturing. And I know that that doesn't necessarily mean that you're not going to be making product for those players. But I guess I wanted to gauge your level of concern or visibility as these companies are talking about in sourcing their PFA manufacturing? What's the potential that that disrupts the tailwind that you guys have talked about from PFA and moving forward?

Speaker 2

So I'll start with we've shared over time the cycle times in our industry. We've shared how long the development processes are in the with the devices that we support our customers on. And so when we're talking about sales in the near term, in the next year or 2 or 3, it's because those programs have been in development for that long and they're actually in manufacturing and or ramping in manufacturing. And so the conversation there is, we have very long lead times and visibility to what we're going to manufacture for our customers on the most important products that they make. And I'll point to, we've continued to grow our product development pipeline.

Speaker 2

We continue to have very strong visibility to that pipeline and the timelines on it. And then the order book gives us incredible visibility to what our customers' demand is because especially with programs, products that are introducing into the marketplace and ramping, customers give us very strong visibility to that because they're looking for us to support their ramp plans. So we have very strong visibility to new product introduction. So we I'll close with multi year insourcing versus outsourcing and we factor that into our guidance.

Operator

Your next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open.

Speaker 6

Good morning. Thanks for taking the questions. And Joe, sorry to push you a little bit on the PFA side, but do you have direct exposure to the growth of that category as we think about it over the next several years, it should be dramatic?

Speaker 2

I don't know that I would characterize dramatic because I'm reflecting on total Integer and our commentary that no one part of our business or one program is going to materially meaningfully drive the company. I will say yes, PFA, we have strong visibility to the pipeline multi generation product development plans and we know which ones we're on and which ones we're working to get on. So we do have very strong visibility and we absolutely expect DFA as a therapy to be a tailwind. And I'll come back to what I think we've talked about a handful of times. It's not only the ablation and the therapy itself, but it's also the access and the diagnostics and the guiding sheath, the transseptal crossing needles.

Speaker 2

It's the full procedure that we're able to participate in, in the industry. And so as electrophysiology procedures grow, we're able to participate in all elements of that. And PFA, if it accelerates the overall number of procedures, we'll benefit from that. Generally speaking, with PFA, we have a higher content on those devices than some of the other ones. And so we benefit from that.

Speaker 2

So I would absolutely expect it to be an important meaningful part of Integer's continued organic growth and being able to grow above the markets that we serve on an organic basis.

Speaker 6

Got it. Very helpful. Appreciate that. And then on Cardiovascular, just in aggregate, the back half ramp, the comps are tougher in the back half of this year. And I know you said this visibility into the back half of the tour is what you've got.

Speaker 6

But can you talk a little bit about I think what's tripping up everybody today is Q2 is a little softer on a 2 year stack basis and that's the pop back up in the back half. So I don't know if it's Ireland or other things you could point to specifically that give people comfort that, hey, getting to the back half performance is attainable versus what I think is a little bit of skepticism just based on the Q2 to your stack performance?

Speaker 2

Well, let me start we said we'd be high single digit growth for the first half and we're at 9.3% for the first half reported basis. So how you break that down between organic and inorganic, we've got very strong visibility to customer demand. We have almost a $900,000,000 order book. And so when we look at the business, I think we've been reasonably good at predicting the level of sales. We know we understand the pieces of those sales because we have specific orders from customers.

Speaker 2

We know the reasons that second half steps up a little bit. We tried to be clear that we expect Q3 sales to be a little higher nominally than 2nd quarter then we expect Q4 to be even higher. A meaningful part of that is the Irish facility that is now online in our possession. We're building more guide wires. We've talked for the last two and a half years the strong demand at our guide wire business.

Speaker 2

And so that's a part of it, but we also have programs in electrophysiology structural heart in particular, also in our emerging PMA customers, mostly neuromodulation. There are programs that are in production and ramping. So it's not going to go into production. These programs are in production and they're ramping and they step up based on customer demand in the second half. And that's what gives us confidence in our ability to hit the second half sales numbers as well as the profitability, which we did increase this quarter.

Speaker 3

Got it. Thanks so much.

Operator

Your next question comes from the line of Richard Newitter with Truth. Your line is open.

Speaker 7

Hi. Thanks for taking the questions. Maybe just to start a little higher level, has anything changed at your OEM customers with respect to their end market demand curves or what their kind of intermediate to longer term ordering patterns look like? Any downward revisions or upward from their outlook that kind of flows down to you? Would love to hear any color there?

Speaker 7

And then I have a follow-up.

Speaker 2

We have not seen any material meaningful change in customer expectation when you look out. I'll frame it into 2025 and beyond given your question about longer term. I mean, sitting here with almost $900,000,000 of order book, we were expecting that order book to start to come down because there are some components or some elements of that higher order book that are connected to the exit of our Portable Medical business, to the strong demand in guide wires that we ask customers to place orders much further in advance given the capacity coming on. We still expect the order book to come down. I would have expected the order book to come down a little sooner than it has.

Speaker 2

And I think that points to the continued strength in the market, continued high expectations of our customers for growth. They continue to place orders further into the future and it gives us tremendous visibility. So I think our customers remain very, very optimistic about their most exciting programs that they're bringing to the marketplace and the overall market growth rates continue to show optimism. And I look to our order book and I look to the order patterns very much in line with what we expected entering the year and they've continued. If anything, the order book might be a little higher than what I would have expected at this point in the year given some of the things that we knew were going to come down in the order book.

Speaker 7

Okay. Thanks for that. And then just making sure, it sounds like everything's trending the way you expected, at least internally. And that's the reason you're reiterating your full year organic outlook. Maybe a little more second half weighted or acceleration weighted relative to the Street.

Speaker 7

So I'm just curious, within that second half kind of outlook, just reached that $448,000,000 roughly for 3Q on revenue and about $458,000,000 on 4Q, I guess is that the right pacing of cadence just to make sure we're a little more appropriately calibrated with your internal expectations? Thanks.

Speaker 2

So our view is 3rd quarter sales nominally is a little bit higher than 2nd quarter and then 4th quarter is higher than Q3. So we see that kind of continued trajectory. If you look at last year, 2023, there was a step up between 2nd and third quarter of $5,000,000 of sales and then in between 3rd Q4, I'm talking 2023 $8,000,000 step up. So it continued to grow as the year progressed and that's what we would expect to happen in 2024 as well. And to your comment about organic growth, guess I would ask folks to kind of stare at Slide 26 in our presentation, which shows medical, non medical.

Speaker 2

The non medical business, it's only 2% of our total sales. But in the first half, the non medical was down 30 6%. So even though it's only 2%, it does create it creates a little bit of drag on the organic growth and that normalizes in the second half of the year. So you won't see non medical being down as much in the second half year over year, which allows the total Integer organic growth rate to lift. But if you look at medical, medical was 7% organic growth in the first half and that's what we expect for the full year.

Speaker 2

So medical continues to perform at that 7 ish percent organic growth and then the non medical has less of an impact in the second half. And I think that's an important thing to point to focus on when you're looking at the organic growth quarter by quarter and then half by half.

Speaker 7

Great. Can I just follow-up on that? So it sounds like the medical is right on track and it's maybe just the non medical that is really what you're relying on for the acceleration and you have increased confidence in that because of what you just called out in the backlog?

Speaker 2

Well, I guess, depending on the term acceleration, I mean, our reported sales in the first half are 9.3%. The guidance for the year is 9% to 11%. So there is a step up on a year over year basis, so slight step up in the growth rate. It is coming from medical as well. I highlighted the ramping programs in electrophysiology, structural heart, emerging customer PMA, the neuromodulation.

Speaker 2

But there was a step up in sales last year from 2nd to 3rd, 3rd to 4th quarter. And so nominally, the sales have to grow to maintain the growth rate on a year over year basis. I'm just highlighting that the organic growth in the first half for medical is 7%. It will obviously maintain that we expect to maintain that for the rest of the year, the second half. Medical is less of a drag and so the total integer gets a little better in the second half.

Speaker 2

But the organic growth in medical continues to improve as we roll into the second half because of the new programs, the ramping programs.

Speaker 7

Okay. That's very helpful color. Thank you for that.

Operator

Your next question comes from the line of Kristen Stewart with CL King. Your line is open. Hi. Thanks for taking the question. It looks like the contribution from acquisitions was a little bit stronger in the quarter.

Operator

I was just wondering if you could provide us an update on how the acquisitions have been going? And then just looking ahead, how you're feeling about M and A in general?

Speaker 2

Great. Sure. Thanks for the question, Kristen. The acquisitions are doing very well. They're slightly ahead of what we had modeled for the first half.

Speaker 2

We're excited to have both Neuroco and Pulse Technologies be part of the portfolio. The organic growth or it's not organic, but the top line growth in that business is because of the programs they had. We've been able to identify really good operational synergies. They've had good ideas that we've been able to learn from. We've had ideas we've been able to share and we're getting strong operational synergies and margin improvement there.

Speaker 2

We would expect over time to be able to get commercial synergies and get the top line growing even faster, but that takes a little longer given the cycle time. So we're very happy with the acquisitions and excited for them to continue to grow both operational and commercial synergies. From an M and A perspective, it's been a pretty active first half overall. If you look at the industry with the number of acquisitions that have happened, some larger dollar acquisitions compared to maybe historical average. But you know we're focused on tuck in acquisitions to make that allow us to maintain our 2.5 times to 3.5 times debt leverage.

Speaker 2

We continue to have a very robust pipeline of opportunities. Our debt leverage is at 3.2 at the end of the second quarter. I'll highlight, we've done almost $550,000,000 worth of acquisitions in the last two and a half years, while maintaining our debt leverage sitting at 3.2 at this point. So we do as the year progresses pay down more debt, generate more EBITDA. So our capacity, our capital available for acquisitions does increase as the year progresses.

Speaker 2

And we don't get to choose when acquisitions want to sell or when they want to transact, but we've got a very robust pipeline that we continue to nurture and curate and are excited to be able to continue to identify tuck ins that fit within our strategy. And just reiterating on an acquisition front, we're looking for acquisitions that are very much aligned with our targeted growth markets and have an accretive growth rate or a clear path to an accretive growth rate and have accretive margins or a clear path to accretive margins, we've been able to identify those in the past and expect to be able to do that going forward for the size of acquisitions that we're looking for.

Operator

Perfect. Thanks for taking my questions.

Speaker 2

Thanks, Kristen.

Operator

Your next question comes from the line of Suraj Kalia with Oppenheimer. Your line is open.

Speaker 8

Good morning, Joe. Thanks for taking my questions. So Joe, a lot has been asked about PFA and sorry for belaboring this. Multi part first question. Obviously, I know you all can give specifics, but FerraPulse is reflected, so we get that.

Speaker 8

Joe, in terms of the organic growth of 4% or so in cardiovascular, right, how should we think about incremental contribution from KFA? And the second part of my question, Joe, would be, even if a client wants to in source from the point that they start the whole program, right? How much of a time does it take for them to completely in source and get to the quality levels that are necessary? It's not going to happen overnight, but just if you could characterize the timeframe.

Speaker 2

Sure. So maybe I'll just on the organic growth for CMV of 4% in the 2nd quarter. This was very much expected by us. The order book we have gives us great visibility. There were no surprises in that.

Speaker 2

I wish our customers' manufacturing plans were perfectly linear. I wish that as the lumpiness that occurs in our customers' production schedules didn't exist, but it does. And I would point to and reiterate that we expect high single digit organic growth in CME. If you look at the Trail Inc. 4th quarters, the CMB business is growing at 12% at 17% reported.

Speaker 2

We've given guidance of low double digit, call it low to mid teens. So we're very excited about our CMB business. Electrophysiology and structural art in particular, they're growing faster than the market. We measure our customer sales, we aggregate that, we look at what the market is growing at and we're growing faster than the market in those two important segments. To your question about in sourcing specifically, we've tried to lay out the cycle times on development programs.

Speaker 2

If it's a 510 program from start to finish, it could be 2 to 3 years of development, 3 to 5 years from the time we start a program, so it turns into manufacturing revenues. And so to the earlier question that was asked about visibility to customers in sourcing or outsourcing, those are the lead times. So it gives us tremendous visibility to our growth and the programs that we're designed into. And we see that as a huge advantage for us because you want us to be very predictable in our guidance and in our growth rates. To your other question on looking at the in sourcing and the timeframes, it's 3 to 5 years.

Speaker 2

We've got great visibility with our customers and we're excited about the growth in PFA given our vertical integration and our ability to support the entire procedure. And when you look at overall just one last comment. Overall trends are towards outsourcing not in sourcing. And the reason for that is our customers are looking for help in getting to the market faster. And given our level of vertical integration, we can manage a lot of the supply chain for them and we see that as a competitive advantage of ours.

Speaker 8

Fair enough. And Joe, a tangential question. Obviously, one of the TAVR companies yesterday was highlighting about constraints on cat lab time, given everything from left atrial appendage to TAVR to this and that to being thrown in the cath lab. I'm curious if through derivative commentary from your end customers, if you could opine on what you all are picking up in terms of Caplab constraints. I guess a lot of your products obviously in CMB are going through the same board of entry, so to speak, right?

Speaker 8

I'm curious if you could shed any color through your end customer discussions. Thank you so much for taking my questions.

Speaker 2

Yes. That's a very front end question that our customers continue to place very high strong demand on us, particularly for their newest most exciting programs and therapies. But we're not involved in touching that part of the cycle, the process to understand their constraints on cath labs, recognizing our demand is coming from their production of products, which is 3 to 6, 9 months ahead of the actual procedure. And so by the time we get demand and orders from our customers, they've already factored whatever the hospital cath lab constraints are into the demand they're placing on us. So we really don't have a real time visibility or insight into that.

Speaker 8

Fair enough. Thank you.

Speaker 2

And so, Suraj, you had asked a question about ramps and maybe yields or quality. There absolutely is a learning curve on ramping new programs. And the thing we focus on is ensuring we've got the highest possible yields when we do ramp and launch a program. But to your point, there is a learning curve on that, especially as the volumes ramp up and the margins typically get better over time as you improve yields.

Speaker 8

Great. Thanks.

Operator

Your next question comes from the line of Nathan Trebek with Wells Fargo. Your line is open.

Speaker 9

Great. Thanks for taking

Speaker 4

the question.

Speaker 9

You brought down CRM and neuromodulation guidance to high single digits from low double digits. Can you talk about what you're seeing in this business? And is there any change in the implied outlook for your TMA portfolio?

Speaker 2

Great. Thanks for the question, Nathan. So on CRM, we had said at the beginning of the year that we expected to continue to see fairly robust CRM specific, not neuro, but cardiac with a management growth. And then we would expect it we were expecting it to normalize in the second half of the year, meaning lower growth rates. That's what we saw based upon the order book and based upon conversations with customers.

Speaker 2

If you look at I'll just point to 2 of the industry players who reported results. Abbott CRM growth rate from the 1st to 2nd quarter step down a couple of 100 basis points. I still think Avid's got a really strong growth rate. I think it was just under 6% in CRM. But the Q2 growth rate for Abbott and CRM was lower than Q1 specifically because we're seeing and expecting that markets are normalizing.

Speaker 2

Abbott is still very strong with they called out there a beer leadless pacemaker program. Boston also had a step down in their growth rate. I think it was 5% to 3%. 1st quarter was 5% growth, 2nd quarter was 3%. So we look at that data.

Speaker 2

We look at what normalized more in the second half, I. E, lower growth normalized more in the second half, I. E. Lower growth rates than in the first half. On your question, and so that's happening as expected.

Speaker 2

It's very much following what we saw at the beginning of the year and what we were hearing. On the emerging PMA customers, we gave guidance for the year of $100,000,000 to $120,000,000 of sales for that group of customers. That's up from $50,000,000 dollars 2 years ago, dollars 50,000,000 in 2022, so very strong growth. We're very much on the trajectory to deliver on that. Those sales are a little more back half, second half weighted than first half.

Speaker 2

So that's where you'll see some additional sales in the second half is with that group of customers. That's because those programs are in production and we're ramping the output based upon their forecast plans and how they're introducing those products into the marketplace. So we do expect to see slightly higher emerging PMA customer sales in the second half of the year compared to the first half and we're very much on a trajectory to deliver that $100,000,000 to $120,000,000 of sales that we had guided to at the beginning of the year.

Speaker 9

Okay. Thank you for that. And just a 2 part question on PSA. Can you speak to the net benefit that you get from PSA in the context of cannibalizing your non PSA ablation business? And then the second part would be, we're hearing that the EP market growth is accelerating in part driven by increased procedures, but there's also the price premium for PFA.

Speaker 9

And I'm just wondering to what extent are you able to capture those economics as a contract manufacturer? Thanks.

Speaker 2

So I'll start. The price premium is on the finished device and a lot of what we're doing for our customers is similar capabilities as what we're providing on current ablation technologies. And so it's not like if our customers are getting a meaningful price premium that that necessarily is flowing through to us, but that's okay because this is a strong business and a strong portfolio with differentiated technologies already and applying them to a faster growing new therapy is a great thing for us. So that's how I think about the price premium. From a cannibalizing cannibalization of current therapies, it's hard to determine what that cannibalization is going to be.

Speaker 2

But net net net, I think everyone believes PFA is ultimately going to accelerate the growth in the marketplace from a procedure volume perspective. And given our participation across the full procedure, on multiple platforms, we see that as a tailwind for us in aggregate.

Speaker 3

Thank you.

Operator

Your final question comes from the line of Joanne Wuensch with Citigroup. Your line is open.

Speaker 10

Hi, this is Felipe on for Joanne. Just looking back to the back half of 2023, I'm thinking about orderly time for your electrophysiology franchise. I'm just wondering if you could remind us of what those look like from your customers. And I guess with the strong start to the first half of twenty twenty four, have you seen any change in lead times? And is there any amount of seasonality that's kind of baked into your guidance?

Speaker 10

Thanks so much.

Speaker 2

So Philippe, I heard the second part. I didn't hear the first part, but let me answer the seasonality about the second half there. There really isn't any meaningful seasonality in our sales. We used to the last couple of years, we had talked about our engineering revenues or the product development revenues that we generate from customers for developing products for them. We had talked about how that was oftentimes back end loaded.

Speaker 2

It was heavier in the 3rd Q4, lighter in the Q1, Q2 in particular. In 2024, we've actually seen a much more balanced profile on our engineering revenues. And the reason that's relevant is, if you think about the cost of doing development work, they're engineers and they're engineers who are on the payroll 365 days a year. So the cost is fairly evenly loaded across the quarters. And when the revenue was back half loaded, you had a little bit of a mix shift there to less margin in the first half, more in the second half.

Speaker 2

For 2024, we've actually seen a much more balanced profile, which is something we've been working on and we've been accomplishing that. So we don't really have any meaningful or identifiable seasonality baked into our second half. Our second half slightly higher sales and growth rate is coming from new programs being introduced. They're already in production, they're ramping as well as the Irish facility coming online and giving us more capacity. And I apologize, I couldn't hear the first part of your question.

Speaker 2

If you could state that again.

Speaker 10

Yes. No problem at all. I'm just wondering on like order lead times for electrophysiology devices. I'm trying to understand like how long it takes from order to actually being used in a procedure, if you're seeing any change in cadence from your customers in terms of order timing, if it's happening more frequently just with like the to the first half of twenty twenty four?

Speaker 2

Okay. So two things. Lead times in general, we haven't seen a meaningful change in lead times and I point to our order book. When lead times come down, which we do expect over time they will, naturally the order book comes down because of that. And so we would expect to see the order book come down with lead times and couple of other specific things.

Speaker 2

In terms of ramps of new programs in electrophysiology, different customers have different approaches to how they approach their buildup of inventory in advance of approval or waiting for approval before they want to ramp. But we oftentimes do get more orders for new programs further into the future so that we have even better visibility to the ramp plans of our customers. But that actually helps us. It gives us much better visibility and clarity on what the next 3, 6, 9 months look like. And then as you accelerate that ramp, you clearly get synergies per the earlier question and the efficiencies that come with that, the yields improve over time as well.

Speaker 10

Great. Thank you. And then just on operating leverage, what gives you the confidence that you can continue to deliver leverage at the rate that you've been doing in the first half of the year and the back half of the year? Thanks so much for taking the questions.

Speaker 2

Sure. So we've continued to see strong operational execution across our manufacturing facilities. We're executing on our manufacturing excellence initiatives, which gave us the gross margin improvement that we saw in the second quarter and first half year over year. We expect that to continue. We're executing on reducing scrap, reducing over time, continued improvement in operator efficiency and really it's calling back some of the inefficiencies that occurred because of the supply chain disruption and the direct labor turnover that we had during the growth years after the pandemic.

Speaker 2

We're now at the company level. We're below the levels of turnover we had prior to the pandemic, which is helping us because our associates become more proficient at what they're doing. That helps to reduce scrap, reduce waste. And so that gives us the confidence and continue to expand margins the rest of the year. Also very much aligned with our strategy of growing operating profit twice as fast as sales, which leads to margin expansion.

Operator

There are no further questions at this time. I will turn the call back to you for closing remarks.

Speaker 1

Great. Thank you, Sarah, and everyone who joined the call today. As always, you can access the replay of this call as well as the presentation on our website. Thank you for your interest in Integer, and that concludes our call today.

Operator

This concludes today's conference call. Thank you for joining. You may now disconnect.

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Earnings Conference Call
Integer Q2 2024
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